For-Profit Colleges Need More Oversight, Senator Says
June 24 (Bloomberg) -- Robert Wetenhall, analyst with RBC Capital Markets, talks with Bloomberg's Mark Crumpton about the oversight of for-profit colleges. For-profit colleges need tougher oversight, according to a report from a Democratic Senate committee chairman that questions the industry’s advertising spending, tuition costs and reliance on taxpayer dollars. (Source: Bloomberg)
For-profit colleges need tougher oversight and regulation, according to a report from a Democratic Senate committee chairman that questions the industry’s advertising spending, tuition costs and reliance on taxpayer money.
The criticism of higher education companies was made in a 17-page report from Senator Tom Harkin, the Iowa Democrat who chairs the U.S. Senate Health, Education, Labor and Pensions Committee. The document, scheduled to be released today at a hearing, was provided to Bloomberg News in advance by a person close to the committee’s investigation.
The Senate oversight inquiry is part of the growing scrutiny of for-profit educations companies, including Apollo Group Inc.’s University of Phoenix, ITT Educational Services Inc. and Career Education Corp. President Barack Obama’s administration is proposing tougher regulation of the industry because of concern that recruiters are signing up unqualified students and leaving them with loans they may be unable to repay.
“The publicly available data, in tandem with mounting reports of questionable practices and poor student outcome, yield a mixed portrait of the for-profit higher education industry that calls into question the taxpayers’ return on their multibillion-dollar investment,” the report says.
Today’s hearing won’t give the public a fair view of for- profit colleges because industry critics dominate the witness list, Harris Miller, president of the Career College Association, said in an interview. The institutions generally provide high- quality education to traditionally underserved groups, such as low-income and minority students, he said.
‘Good Return’
“When you consider all the facts, both taxpayers and students are getting a very good return on their investment,” said Miller, whose group represents more than 1,400 for-profit colleges.
Senator Michael Enzi of Wyoming, the ranking Republican on the committee, will defend “legitimate programs” in for-profit education, Steve Wymer, a spokesman for the senator, said in an e-mail. The sector is “an essential part of our efforts to provide every American with the skills necessary to be a valuable part of the workforce,” he said.
ITT Educational Services, based in Carmel, Indiana, fell $1.17, or 1.3 percent, to $90.20 yesterday in New York Stock Exchange composite trading. Apollo, based in Phoenix, declined 22 cents to $46.33 in Nasdaq Stock Market trading yesterday. Career Education, based in Hoffman Estates, Illinois, gained 50 cents, or 1.9 percent, to $26.39.
Rising Enrollment
The number of students attending for-profit colleges rose to 1.8 million in 2008, from 550,000 in 1998, according to Harkin’s report. Federal aid to for-profit colleges has jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Department. The five largest publicly traded for- profit companies received 77 percent of their revenue from federal financial aid programs in 2009, up from 63 percent in 2002, the report said.
Harkin’s report said one unnamed company had 2009 operating profit of $489 million on revenue of $1.3 billion, a 37 percent operating margin -- almost double that of Apple Inc. ITT reported those revenue and profit figures in securities filings. ITT couldn’t be reached for comment.
Eight publicly traded companies -- those that break out such data -- spent half their budgets on education, 31 percent on recruiting and marketing and 15.7 percent on undefined administrative expenses, Harkin’s report found.
Marketing Costs
At least one company spent more on marketing than on education, the report said. Bridgepoint Education Inc., based in San Diego, spent $145.7 million on marketing and promotional expenses last year, compared with $120.1 million on instructional costs and services, according to a securities filing. Bridgepoint couldn’t be reached for comment.
For-profit colleges are more expensive than comparable non- profit schools and leave students with heavier debts, the report said. “Staggering” numbers of student leave for-profits each year, presumably without degrees, according to Harkin’s report. Default rates on government loans in the industry are also higher than similar public and nonprofit institutions, the report found.
The disparities reflect the lower socioeconomic background of students, Miller said.
The hearing scheduled today will feature testimony from Steven Eisman, a hedge-fund manager whose bet against the housing market was chronicled in a best-selling book. In his written testimony, Eisman compares for-profit colleges with the sellers of subprime mortgages. Both left customers with heavy debts they can’t repay. Eisman is shorting, or betting against, education stocks.
‘Cusp’ of Disaster
“If nothing is done, then we are on the cusp of a new social disaster,” Eisman said, according to a copy of his prepared remarks.
The analogy between the two industries is “as silly as it is simplistic” because degrees from for-profits benefit the economy, and the institutions must provide value to protect their reputations, the Career College Association’s Miller said in a speech yesterday at the National Press Club in Washington.
Two other witnesses, Margaret Reiter, former supervising California deputy attorney general and Department of Education Inspector General Kathleen S. Tighe, will also be critical of industry practices, according to their testimony.
Recruiters from Career Education’s Sanford-Brown Institute in White Plains, New York, pressured former student Yasmine Issa to enroll, then left her with $20,000 in debt and unable to find a job as an ultrasound technician, the mother of two says in her prepared testimony.
“It’s hard to find work without a marketable skill, but going to Sanford-Brown to get one has left my family and me worse off than if I had never gone back to school,” she said.
Career Education can’t discuss an individual student’s experience because of privacy laws, spokesman Jeff Leshay said in an interview. The comments expected at the hearing about Career Education “don’t reflect a full understanding and appreciation for the quality of education we provide,” he said.
To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net.
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